Hall, B E, 2006. Strategic versus Tactical Approaches in Mining, Perth.
“Short Term Gain for Long Term Pain”
How focussing on tactical issues can destroy long term value
By B E Hall 1
Introduction
Operating policies at many mines ensure that shareholder value
is not maximised. In a number of studies developing strategic
mine plans, it has become evident that traditional methods and
conventional wisdom often do not achieve stated corporate
goals. Changing the overall strategy can provide significant
value gains. Typically, the new optimal plan involves a
significant increase in the cutoff grade, at least in the earlier
years. An increase in the underground development rate or open
cut stripping rate is often associated with this, at least in the
short term, to establish the new strategy. Cost minimisation is
found to be counter-productive. Counter-intuitive plans are
often found to be optimal. For example, optimal cutoffs for
different parts of an underground mine may be significantly
different, even if mineralisation and cost structures are similar.
Optimal plans have been found in many cases to be relatively
insensitive to changes in major value drivers, such as metal
prices, while sub-optimal strategies are frequently found to
have a significantly greater financial risk. Identifying and then
operating within the framework of an optimal strategic plan can
have substantial benefits over a plan being continually driven
by short-term tactical issues.
Expediency in Operational decision-
making
The main thrust of this paper deals with planning and conscious
decisions about long-term operating policies. This section,
however, highlights briefly the impact of expediency in
operational decision-making, and the impact that this may have
on the achievement of the overall corporate goals. A few
examples are given. These are typical of many instances
observed over the years by the author and his colleagues, and
have occurred at a number of operations. It is suggested that
these types of decisions often arise because of the measures
used to assess the performance of operating managers, which
often place a high emphasis on regular achievement of
production targets. This is of course a good thing, but if it leads
to decisions which generate “short term gain for long term
pain”, then perhaps the focus of senior management, or the
understanding of the goals by the operating manager, needs to
change. None of this should be taken to imply that management
is not free to make such decisions if all factors, both short-term
and long-term, have been identified and weighed, and an
informed decision made. Frequently, however, these decisions
arise from a corporate, or even industry, culture that values only
short-term performance, and that either fails to identify long-
term effects, or deliberately ignores them, assuming that they
will be fixable at a later date.
1. Principal Mining Consultant, AMC Consultants Pty Ltd,
12/179 North Quay, Brisbane QLD 4000
E-mail: bhall@amcconsultants.com.au
The examples are in the context of underground metalliferous
mines, though similar situations no doubt exist in other sectors
of the industry. The challenge for mine technical and
managerial staff is to identify where these types of things are
happening in their operations, and to address the culture and
attitudes that allow them to continue to occur.
Chasing every high-grade tonne
It is often said that “grade is king”, and correctly so. Yet on
many operations, small amounts of high-grade ore are targeted
without consideration being given to how this impacts on the
overall achievement of production and financial targets. In
some cases, there is no assessment of the desirability of getting
those tonnes at all: if it is above cutoff, it is to be mined, and
the higher the grade, the more desirable it is, regardless of the
cost. Additional development, often through poorer ground than
normal, with reduced advance rates and increased costs, may be
required. It may also be necessary to deliberately incur dilution
to produce practical mining shapes to recover this material: the
high-grade material in-situ can easily become an average or
low-grade ore source.
Many operations at least do an analysis to identify whether such
material actually generates a positive cash flow, taking account
of the costs directly incurred to produce it and the additional
revenue received from it. To the extent that this analysis fully
accounts for dilution and increased costs due to slower advance
rates and increased ground support, this is good. However, it is
rare to find an analysis which accounts for the “opportunity
cost” of applying mining resources to this material.
All mines have limited resources, including such things as
labour hours and machine hours per time period. One of the
goals of the planners and the operators must be to make best
use of these resources. As well as identifying the simple
profitability or otherwise of a target block of ground, it may be
worthwhile identifying the effort involved, and generating
measures other than metal grade per tonne by which potential
ore sources may be ranked. Measures such as “net revenue per
mill hour” (especially useful if different rock and mineral types
have different milling rates and metallurgical recoveries), and
“net profit per man-shift” or “per jumbo-hour” may give a
totally different view of the value of a block of ground from
just grade alone. All other things being equal, the goal of the
operation should be to generate the most profit from the
resources available, and grade alone will often not be the best
guide to what should and should not be mined.
In this and other contexts, there will be the associated issue of
“if we don’t mine it now, it will be sterilised forever”. This is
addressed later in this paper.
Avoiding production delays to install infrastructure
For a variety of reasons – some acceptable as a normal part of
the ongoing obtaining of knowledge in mines, others due to
Short Term Gain for Long Term Pain
poor planning or earlier operational decisions – it will
sometimes be necessary to disrupt production activities in order
to install infrastructure for the future of the operation. Where
the decision involves for example access to future production
areas, the short-term disruption will usually be seen as a
necessary evil, and the planned work will proceed. But if the
planned work is for services, such as ventilation and drainage,
then depending on the culture of the company, the relative
power of operators and planners, and the time horizon of
management, it may be that the decision is to forego the
installation to avoid the short-term disruption. The long-term
effect of this may be that the operation can never deliver the
planned production rate, as the facilities to support it have not
been provided.
As indicated above, if all of this has been evaluated, and the
relative costs and benefits of the alternative plans have been
assessed, then it is the prerogative of the management to make
the decision as they see fit. Unfortunately, it is often the case
that the downsides of these options are not fully evaluated:
planners may have significantly less power than operators who
perceive that the temporary reduction in output will reflect
badly on them, and / or the shortage of technical staff currently
experienced in the industry results in there being insufficient
time to evaluate fully the relative effects of the two options. In
the absence of information about the downsides, an uninformed
and ultimately costly decision is made.
Cutoffs and Production Rates
In many operations, the importance of cutoff for delivering
long-term value from the operation is still not well understood.
The optimum cutoff will generally vary over time, and at any
point in time (Lane, 1988) depends on the prices for the
product(s), the cost structure of the operation, the tonnage /
grade relationships of the mineralisation accessible in the
period being assessed, and the capacities of the operation to:
1. Mine “rock”, which is then available for classification
as “ore” or “waste”,
2. Produce and treat “ore”, and
3. Produce, handle and sell “product”
The term “ore” in this context refers to mined material that is
sold or sent for processing to generate a saleable product. It is
not used in the strict sense of the definitions in the various
international codes for the public reporting of resources and
reserves.
In open pits, “mining” in the simplest cases is the removal of all
the “rock” from within the designed pit limits, and this does not
notionally become “ore” or “waste” until trucks diverge on the
haul routes to ore and waste dumps on surface. In more
complex cases, with different drilling patterns and / or loading
and trucking fleets for ore and waste, there is a more complex
relationship between ore and waste handling capacities, and
hence between rock and ore handling capacities, within the pit.
In underground mines, “mining” in this context typically relates
to development of declines and strike access development in
waste. These openings give access to mineralised material
which can then be classed as “ore” and stoped, or left in-situ as
“waste”. In this three-fold classification of material as rock, ore,
or product, most activities in open pit mines are typically
dealing with rock, whereas most activities in underground
mines are typically dealing with ore.
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For a full understanding of modern cutoff theory, it is important
to appreciate these differences. All operations will have
capacity limitations for all three material types, and at least one
of these will normally be constraining the operation. Often, and
particularly in mature operations, ongoing debottlenecking will
result in a balance of both rock and ore capacities – in open
pits, both the mining fleet and the treatment plant will be
working at capacity, though the run-of-mine (ROM) cutoff may
vary to maintain this situation. In underground operations,
waste access development and ore throughput will be at their
limits, though the ore limitation may be in either the mine or
the treatment plant. In underground operations that continue
below a previous open pit, it is not uncommon to find that the
access development rate is the overall limitation – even if
performing at its maximum capability, insufficient
mineralisation with grades adequate to cover marginal costs of
production and treatment is exposed to “fill the mill”. Product
constraints are not a concern for most operations. Treatment
plants are usually designed to handle maximum ore quantities
at grades above the expected average, and downstream product-
handling facilities are also designed to cope with these, perhaps
with some short-term stockpiling of product, so normal grade
fluctuations do not constrain the ore throughput. However,
some operations have genuine constraints on the amount of
product they can sell, and many operations experience periods
of extra-high grade production, when the amount of product
that can physically be generated or handled becomes the overall
production constraint. However, strategic options that involve
increasing the cutoff and therefore the head grade may result in
scenarios where the capacity of the product part of the mill
circuit becomes the overall constraint.
Underground Operations
Existing strategies have been found to be suboptimal in a
number of strategy optimisation studies conducted by the
author and his colleagues in recent years. Figure 1 shows a
typical “Hill of Value” (HoV) for an underground metalliferous
mine. The vertical axis is Net Present Value (NPV), though
HoVs can be generated for all parameters of interest to the
company (Hall, 2003, Hall and de Vries, 2003), to allow
selection of strategic policies that deliver close to the best for a
number of corporate goals, rather than the best for one goal
only.
Operations are found to be frequently operating with both
cutoff and production rate lower than optimal, as shown in the
figure. Some of the reasons for this are discussed below.
Typical causes of sub-optimal strategies
The sub-optimal production rate is often found to result from
failure to utilise the existing productive capacities, which in
turn is often due to cost savings that result in insufficient
development of ore sources to ensure that planned production
can be maintained should something go wrong with one of
them. “Just In Time” development in underground mines
frequently turns out to be “Just Too Late”. Cost savings can
severely reduce overall value.
Cutoffs are frequently too low because they typically fail to
account for “sustaining” capital expenditure (the regular
ongoing cost of maintaining the productive capacities of the
plant and equipment and mine accesses), and the time-value-of-
money “opportunity” cost of deferring higher-grade sources in
order to produce from lower-grade sources. Sustaining capex is
simply another regular cash outgoing, the same as
administration overheads. Its separate treatment in the financial
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Short Term Gain for Long Term Pain
Figure 1 - Variation of NPV with cutoff and production target – underground
accounts should not cause it to be ignored in cutoff
determinations. In fact it can be shown (though it is beyond the
scope of this paper to do so) that the net cost of capital
expenditure is higher than that of an equivalent amount of
operating expenditure, and it should therefore if anything bear a
surcharge rather than be ignored in “breakeven” calculations.
(It should be noted that the terms “breakeven” and “cutoff” are
not synonymous, though breakeven calculations are frequently
used to determine the value used as the cutoff.)
Moving to an optimal strategy
The “production rate” axis in Figure 1 is the ore production and
treatment rate. Maximising value at the same cutoff will
typically involve an injection of working capital by way of a
temporary increase in the development rate. This will increase
the number of sources producing concurrently, in order to
guarantee delivery of the actual ore handling and treatment
capacity already available. Increasing the cutoff at the same
production rate will require both a permanent increase in the
development rate, since the ore tonnes per metre of
development will typically reduce with increasing cutoff, and a
further temporary increase, to re-establish the working stocks of
“developed ore”. The HoV shown also accounts for product
constraints that may become active at high production rates and
/ or cutoffs.
Many operations that increase their cutoffs, particularly as a
rapid response to poor profitability and a perceived need to
increase head grade, do so almost instantaneously, with little or
no planning or immediate increase in development capacity.
Developed ore stocks remaining at the higher cutoff are quickly
consumed and within a few months, the mine has a production
shortfall, as there are insufficient sources developed to sustain
the planned production rate at the new cutoff. If lower grade
sources that had been developed at the previous lower cutoff
are still accessible, these may have to be mined as marginal
material, but often with increased costs for access rehabilitation
and / or extra development, and with a significant reduction in
overall head grade. If these areas have been sterilised, there
may be no alternative but to suffer the loss until the balance
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between development and production rates and developed ore
stocks has been re-established.
This does not imply that cutoffs cannot be changed quickly.
Rather it highlights that cutoff is an important strategic mine
design parameter, and changing from an existing strategy to a
new one is not a simple operational tactical issue, but one that
requires careful planning and scheduling of the transition to
predict and avoid problems such as those described.
Varying multiple strategic policy items over time
It is assumed in Figure 1 that at each cutoff and production rate
combination, the optimum mining schedule has been
developed. There is no guarantee that a general development
and stoping sequencing strategy that is optimal for one set of
design parameters will be optimal for another. A full
optimisation methodology must be able to account for this.
Also, the three-dimensional nature of the chart allows plotting
of only two independent design variables and one dependent
variable. The cutoff specified on the cutoff axis is fixed for the
life of the mine, which is how many if not most mining
operations are planned. Even with this limitation, increases in
NPV of 10% to 50% have been observed in a number of
studies, for cutoff increases ranging from 30% to 50% of the
value in use at the start of the study (Hall and Stewart, 2004).
However, cutoff and the rock, ore, and product capacities can
all vary, and it is well known that maximum value is obtained
with a cutoff that can vary over time. The HoV shown could
therefore be at least four-dimensional, with another independent
variable axis for time, or perhaps six-dimensional, to allow for
independent specification of alternative mine access
development and product handling capacity changes. By
varying the cutoff over time, additional value is potentially
obtainable by mining higher-grade material first, then lower-
grade material at a later date, to the extent that it has not been
sterilised by the earlier higher-cutoff mining. But even if all
lower grade material is sterilised at any cutoff, the HoV as
shown indicates what the best cutoff is.
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Short Term Gain for Long Term Pain
In caving mines, there may also be at least two different
cutoffs, the one defining the “footprint” or in-situ volume of
ground planned to be developed as “ore”, the other being the
“shutoff” defining the lowest grade of broken rock to be
extracted from drawpoints.
Varying strategic policy items by location
Different cutoffs can also be applied to different areas within a
mine to increase value (Hall and Stewart, 2004, Horsley, 2005).
Figure 2 shows schematically how this arises. In the first part of
the figure, two areas with similar mineralisation, mining
methods, and costs structures, and therefore notionally the same
Figure 2 - Value-adding by different cutoffs in similar areas
In this simple example, the cutoff policies to maximise value
would be easily determined. In a real operation, dependencies
between various mining areas and other scheduling and
sequencing constraints and options may make the selection of
the optimal cutoff policy for all areas over time non-intuitive
and non-trivial. Sophisticated optimisation techniques may be
required to select the best strategy.
Dangers of sub-optimising for subsidiary parameters
Assume an underground operation that is both developing at the
maximum rate in waste access headings, and, at the identified
optimum cutoff, delivering the maximum quantity of ore that
the mill can treat. There are also a number of activities in the
mine that could potentially constrain the amount of ore
produced. These include the in-ore development rate, the
production drilling rate, the charging and blasting rate, the ore
mucking rate, and the ore trucking or shaft hoisting rate. Given
the variations in these over time, and the different sizes of
incremental capacity steps in each, it is unlikely that all of these
will always be in balance.
Short-term tactical key performance indicators (KPIs) for
operating managers typically include such things as maximising
equipment utilisation. While this is notionally good, a better
KPI is optimising utilisation. The difference is subtle but
critical. Because of the imbalance in capacities of the various
potential ore-constraining activities, the optimum mining
strategy will involve some activities, and therefore the
associated equipment, operating under capacity, rather than at
maximum capacity. Attempting to operate all activities and
equipment at maximum capacity will at best increase costs, and
at worst, result in a defacto lowering of the effective cutoff,
thereby reducing value.
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breakeven and cutoff, are mined. Different lives for the two
areas result in an unprofitable low production rate tail that will
be truncated by mine closure (if fixed costs cannot be
sufficiently reduced to allow it to be mined profitably). During
the life of the mine, production from the longer-life area will
contain material that is above the common cutoff for both areas,
but which is of lower grade than some of the material that
remains unmined when the mine closes. The second plot shows
how the cutoff in this area can be increased so that, at the time
the mine does close, the best possible grades have been mined
from both areas.
Consider for example spare ore development capacity.
Although the mill is being kept full at the optimum cutoff, there
is always the temptation to mine lower-grade material, whose
grade nevertheless is sufficient to pay for its own marginal
costs, because “if it’s not mined now, it will be sterilised
forever”. There is therefore the temptation to utilise the spare
ore development capacity to extend ore development into
material slightly below the identified optimum cutoff, which
improves the utilisation statistics for the development
equipment. Although the mill is being filled with above-
optimum-cutoff material, developing into lower-grade areas
will result in those areas also being produced, effectively
lowering the cutoff, and thereby moving to a lower-value area
on the Hill of Value, by deferring production of the higher-
grade ore that should have been mined.
If the mill were not being filled with above-optimum-cutoff
material, this would be a good tactical plan in the short-term.
However, it must cause the mine staff to question why this
situation has arisen. If simply a result of “normal” variations in
the mining cycle, short-term variations in effective cutoff are an
appropriate response. But if the shortage of above-optimum-
cutoff material is longer-term and resulting from a deviation
from the strategic long-term plan, it will be necessary to not
only devise a short-term tactical plan to get back to the
optimum long-term plan, but also to identify what led to this
situation and take appropriate steps to prevent its reoccurrence
in the future.
The big danger, however, is for the short-term tactical response
to become the long-term strategy by default. It is easier to fill
the mill with a lower cutoff (it takes some of the pressure off
the waste access development), the additional “ore” is
apparently “economic”, and the jumbo utilisation statistics
improve. The apparent tactical benefits will result in a move to
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Short Term Gain for Long Term Pain
a sub-optimal strategic plan. If there were no other productive
work for them, it would actually be preferable to pay the
development crews to do nothing, rather than to incur the
additional variable costs of extra development that then causes
value-destroying material to be added to the ore stream.
A similar situation often exists in sublevel caving operations,
where the shutoff used is often a relatively low marginal
breakeven grade. Significant value can be destroyed by
continuing to draw low-grade material when the next ring could
have been blasted and higher-grade ore produced.
Open Pit Operations
Suboptimal strategies have also been found in use in open pits.
Figure 3 shows a typical “Hill of Value” for an open pit base
metal mine, plotted as contours of NPV. The independent axes
Figure 3 - Variation of NPV with cutoff and mining rate – open pit
Varying multiple strategic policy items over time
Figure 3 has been generated simply by accelerating or
decelerating the existing planned mining sequence. There is no
guarantee that this sequence is the best, or is even practical, at
all mining rates evaluated in the initial calculation. As with the
underground situation in Figure 1, the three-dimensional nature
of the chart allows plotting of only two independent design
variables and one dependent variable. The cutoff and mining
rate factors in Figure 3 are fixed for the life of the mine, but
cutoff and rock, ore, and product capacities can all vary, and it
is well known that maximum value is obtained with a cutoff
that can vary over time. Other design parameters that can be
varied include such things as the sinking rate of the pit (e.g. in
terms of metres or benches per year) and the ultimate size of the
pit (expressed perhaps as a volume, tonnage, or Whittle “Pit
Shell Number”). The HoV shown could again be multi-
dimensional, to allow for independent specification of
alternative mining and treatment capacity and rate changes.
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are the ROM cutoff (for ore sent directly to the mill) and the
overall “rock” (i.e. ore + waste) mining rate, expressed in this
case as a percentage of the base case rates in the pre-existing
plan, which may vary from period to period.
The figure indicates that, as the mining rate increases from low
values, more material is available for treatment, and the cutoff
can be increased to supply higher grades to the mill. Material
below the ROM cutoff is stockpiled for later treatment if
profitable. Up to a point, the higher grade, and hence increased
revenue, more than pays for the increased mining costs, and
value increases. Eventually, the mining rate will increase to the
point where the tonnage / grade relationships of the deposit are
such that any revenue gains are exceeded by the extra mining
cost.
Dangers of sub-optimising for subsidiary parameters
It was noted above that the simple picture presented by Figure 3
at higher mining rates might not be achievable, but a more
detailed analysis would account for any implicit
impracticalities. However, a reduced mining rate will always be
a practical alternative. It is not uncommon to encounter a desire
to reduce the mining rate, in effect by deferring waste stripping,
which reduces the overall rock mining capacity earlier in the
mine’s life. (This may or might not be countered by an increase
later.) The effect of a lower mining rate is to reduce the amount
of mineralised material available for classification as ore in the
time period in question. To maintain mill throughput, it is
necessary to reduce the ROM cutoff, moving to a new mining
position below and to the left of the current position on the plot.
The value of the operation reduces, as the cost savings from
reduced mining rates are more than offset by a drop in revenue
from lower ore grades.
It can also be seen in Figure 3 that the value contours are
significantly closer to the left of and below the peak in the
figure than in the other areas of the chart. The overall
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Short Term Gain for Long Term Pain
implication of this pattern is that it is more costly in the long
run to be mining too slowly than to be mining too fast by the
same proportion.
Issues Common to Open Pits and Underground
Operations
The danger of evaluations at one cutoff or production
rate
Many operations still use a simple break-even grade as the
cutoff. This takes account of prices and costs only, though the
rock, ore and product production capacities provided will
influence the costs used in the calculation. It is also not
uncommon to find that these cutoffs are set early in the
exploration process, using high-level cost estimates, when the
size and shape of the “orebody” is first becoming apparent.
Scoping studies are conducted to obtain an initial estimate of
the value of the potential project and to justify further
Figure 4 - Potential losses from evaluations at one cutoff
Testing the impact of apparent limitations
There will be practical upper limits on many physical capacity
parameters, such as the rock, ore, and product rates, which will
make some parts of the HoV impractical. If the value of the
HoV surface is increasing at those limits, the “hill” effectively
ends at a “cliff”, and the indicated optimum strategy will be to
work with that particular limiting parameter at its limiting
value. In other cases, the value of the operation will be falling
when it reaches the cliff, and the optimum strategy will then
occur at the peak of the HoV.
As well as the more usual apparent constraints, such as limits
on the various production rates, there may be practical upper
limits on, for example, cutoff. The nature of the mineralisation
may be such that zones above a particular grade may not be
able to be delineated for selective mining in practice, even
though geologically they are known to exist. The cutoff cannot
practically be specified above that grade. Similarly, the existing
geological model may have been developed to identify material
above a certain grade, and “orebodies” at cutoffs significantly
below that grade may be unreliable. However, it is often
worthwhile continuing calculations and evaluations beyond
these apparent limits. If the peak of the HoV is found to lie
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exploration and / or more detailed studies. Subsequent studies
often then result in the specification of mining fleets and
facilities and treatment plants designed to handle waste and ore
quantities (and qualities) defined by the initial approximate
cutoff, with no guarantee that the best combination of capacities
and cutoffs has been selected. Tactical decisions (i.e. to save
time and costs) during the evaluation and feasibility study
process can result in the specification of a significantly
suboptimal strategy.
Figure 4 illustrates how this can happen. Using only a single
cutoff in the evaluation, “Strategy A” may appear significantly
better than “Strategy B”. An analysis at a range of cutoffs can
give a significantly different outcome. The same effect may be
seen for other strategic decision parameters, such as rock
mining and ore production rates.
within acceptable ranges for the various parameters, there are
no problems. But if the peak of the HoV lies beyond one of
these limits, the difference between the peak value and the
value at the limit gives an indication of what could be spent to
remove the limitation, which in many cases will be more a
function of current practices than an absolute and unchangeable
constraint.
The effect of mining rate on optimum cutoff
It is not uncommon to find that an increase in mining rate is the
solution proposed to get a marginal mine out of trouble. The
assumption is that similar head grades, and hence cutoff grades,
can be maintained. If the transition to a higher rate is properly
planned and executed, with a corresponding increase in the
waste development (underground) or waste stripping (open pit)
rate, this may be so, and value gains can be realised – e.g. by
moving higher up the HoV in Figure 1 at the same cutoff, but
not going as far as the “Typical improvement proposal” shown
there. (If waste mining rates are not increased, similar
production shortfalls such as those described above for
increasing the cutoff in an underground mine may occur.)
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Short Term Gain for Long Term Pain
It is often then postulated that, if the production rate is
increased, the cutoff can be reduced to increase the reserve and
the return. It is reasonable to expect that increasing the
production rate will reduce the breakeven cost per tonne of ore.
However, Figure 1 demonstrates clearly that reducing the
cutoff, though it may increase the reserve, will reduce the NPV,
not increase it. The cutoff will however have to be reduced if
the waste mining rate does not increase in line with the ore
production rate: this is the same situation as reducing the waste
mining rate at the same ore treatment rate, as described for open
pits above.
The implication of this is that the optimum combination of
waste mining and ore treatment rates and cutoff will vary
depending on whether one of the constraints is to be artificially
constrained or not, e.g. by deliberately reducing the waste
mining rate, or by deliberately or unconsciously not allowing it
to increase in line with a planned ore production rate increase.
The costs savings from imposing a limit may be more than
eroded by loss of revenue from lower head grades.
The effect of metal prices and costs on optimum cutoff
Conventional wisdom suggests that if prices go up, cutoffs
should go down in inverse proportion, and vice versa. And
similarly, if costs reduce, cutoffs should go down in direct
proportion, and vice versa. These are true of breakeven grades,
and if the cutoff selected is a breakeven, then they will be true
of those cutoffs also. However, Hall (2003) and Hall and
deVries (2003) have demonstrated that this is not the case for
optimum cutoffs that maximise NPV.
For optimum cutoffs, a number of case studies have
demonstrated that the changes in optimal cutoffs are
substantially less than suggested by the preceding hypotheses.
The methodology developed by Lane (1988) indicates
theoretically why this is so. If a “balancing cutoff” as defined
by Lane is the current effective cutoff, it will be unaffected by
price and cost variations, being solely the result of the physical
plant capacities and the nature of the mineralisation. The
“opportunity cost” terms in two of Lane’s “limiting” cutoffs
even make it possible for these cutoffs to move in the opposite
direction to that suggested by the conventional wisdom, and
this effect in the optimum cutoff has been seen by the author in
some studies.
These effects make it impossible to predict the movement in
optimum cutoffs for any specified price or cost changes without
performing a full analysis of the strategic plan.
Hall (2003) and Hall and deVries (2003) have also
demonstrated how working with a typical sub-optimal cutoff
will increase the volatility of returns as prices change, and can
significantly increase the risk of achieving low or negative
returns when prices fall. Operating with optimum cutoffs for
lower prices will frequently capture most of the upside from
price rises, and can significantly reduce the downside risk of
price falls. The relatively small changes in optimum cutoffs
observed, coupled with the relative flatness of the peaks of the
Hills of Value, often mean that optimum mining strategies are
relatively insensitive to changes in economic conditions,
whereas suboptimal strategies on the slopes of the HoVs may
require significant changes, perhaps with little notice, when
conditions change.
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The Timing of Infrastructure Capital
Spending
Saving or deferring of costs is always an important and valid
way of improving the value of an operation. Frequently,
however, the short-term tactical benefits cause long-term
strategic problems. The issues often arise at the time of
preparing the annual capital and operating cost budgets.
Provisional budget items are often treated as “wish lists”, and
the question will often be to the effect of: “Do we have to do or
spend this now? Can it be deferred?” The answer is often “Yes,
but . . .” “Yes”, the item can be deferred, in the sense that the
mine is not going to come to a complete standstill overnight if it
is not done. “But” the operation may be less efficient, and the
cost, either extra direct costs of doing it later, or lost revenue
from lower production, may be significantly greater than the
immediate savings apparently made.
As above, if all aspects of the alternatives have been evaluated,
and the relative costs and benefits of the alternative plans – to
spend or not to spend – have been assessed, then it is the
prerogative of the management to make the decision as they see
fit. But again, it is often the case that the effects are not fully
evaluated – the downside costs or loss of revenue may be
difficult to quantify, while the direct cost of the item in question
is plain – and in the absence of information about the
downsides, an uninformed decision to “save costs” is made.
Service Facilities
If the planned work is for service facilities, foregoing the
installation to save costs in the short-term may result in a
failure to provide the services needed to support the planned
production in the future. “Required Volume of Clean Air” is a
resource that rarely appears in mine scheduling systems, but it
may be crucial to enable various planned activities to proceed
in parallel. If it is not available, activities may have to proceed
sequentially, extending the overall duration of mining activities
associated with a given tonnage of ore, thereby reducing the
overall mining rate. Similarly, inadequate drainage can not only
result in increased wear and tear on equipment, but can also
reduce the rate at which it can operate, restrict access to
working places, and / or require labour and equipment that
could otherwise be allocated to productive activities to be
allocated to drainage system maintenance and clean-up of mine
openings.
Mining Information and Production Infrastructure
Cost savings by deferring capital development underground or
waste stripping in open pits, and expenditure on exploration or
infrastructure such as a shaft, can also have a significant
negative impact on overall profitability. Deferral of waste
stripping in open pits has been discussed above. Slowing
decline advance rates in underground operations can have a
similar effect.
While improving truck haulage efficiencies are continuing to
extend the economic depth of trucking – in many instances to
below 1000m below the tipping point – this does not
necessarily imply that a shaft should not be sunk until that
depth is reached. Deferring the sinking of a shaft can both
reduce the value of the operation and significantly shorten its
life. However, the increasing economic depth of trucking
appears to provide some comfort to managers deciding to defer
shaft sinking capital expenditure. Also, many operations limit
in-mine exploration expenditure to merely continue to provide
perhaps two or three years’ worth of reserves. Together these
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Short Term Gain for Long Term Pain
types of cost-saving policies can have a major negative impact
on value. The limited reserves may never be sufficient to justify
the capital outlays for more efficient infrastructure, by reducing
operating costs over a long enough period of time. If sufficient
mineralisation is eventually proven, it may be too late to have
an effect.
The example below relates to trucking all ore to surface, versus
installation of a shaft, with reduced trucking up to the bottom of
the shaft. The rationale however applies to any situation where
major capital expenditure to install efficient systems can
significantly reduce future operating costs.
Figure 5 - NPV with trucking only, and a shaft starting at different times
The “trucking only” curve shows a maximum value at a little
over 1000m depth, which is therefore the economic limit of
trucking. A dashed line at this value to greater depths indicates
the value that a shaft option must have to be better than
trucking only. A dotted and dashed line $5M dollars above this
indicates the value that a shaft option must have to be that much
better than trucking only – a “safety margin” to perhaps account
for some of the risk associated with the large up-front capital
cost of the shaft option. With a 1000m deep shaft, the economic
depth of the mine – with trucks hauling up to a tipping point
above the skip loading station – is about 1550m - 1575m.
The time of the start of shaft hoisting is expressed as the
elevation of the production front, which in the scenario
illustrated is moving down at 40 vertical metres per year (“vm /
yr”). The lines plotted for shaft hoisting starting at 100 vm
intervals therefore represent deferral time increments of 2.5
years. It can be clearly seen that deferring the shaft option (the
value of which includes the capital costs thereof) results in
decreasing value, as the later the start, the less ore is hoisted at
the lower shaft operating costs.
If the mineralisation extends to at least the economic depth of
say 1550m, then the shaft option will no longer deliver the
required $5M margin over trucking only if the start of shaft
hoisting is deferred beyond when the production front is at
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Value lost by deferring spending on infrastructure
Hall (2005) describes a hypothetical steeply-dipping orebody,
with a single production front moving vertically down through
it. Production is by truck haulage, currently to surface, and a
shaft to 1000m depth has been proposed. In the scenario
presented, Proven and Probable Reserves currently extend to
900m depth, and Inferred Resources extend some distance
beyond that. The deposit is still open at depth. The analysis has
projected the known orebody characteristics to 2000m depth to
assess what the company’s options might be. Figure 5 shows
the effect of deferring the shaft sinking decision.
about 1030m. The value of the shaft option falls below the
maximum value with trucking only if the start of shaft hoisting
is deferred beyond when the production front is at about
1140m. If the mineralisation is closed off at a shallower depth,
earlier shaft starting times are needed to make the shaft option
viable.
If analyses were done at one final depth of the mine only
(typically the known bottom of mineralisation at the time of the
evaluation, and often with a downgrading factor applied to
Inferred Resources), a value destroying decision could be made.
This is similar to the situation in Figure 4, for analyses done at
one cutoff. Although the value of the shaft option is greater
than the value of trucking only for most specified final depths
below the shaft starting depth, shaft hoisting is nevertheless not
always the best option. As is evident in Figure 5, the value of
the shaft option at a range of final depths of the mine can be
significantly less than the value at the economic limit of
trucking only if the shaft is deferred too long.
It can also be seen that deferral of the shaft effectively results in
a range of uneconomic final depths of mining. For shaft
hoisting starting when the production front is at 1000m depth,
mineralisation extending below the economic limit of trucking
(at approximately 1030m depth) is uneconomic unless it
extends below 1150m, at which point the shaft curve exceeds
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Short Term Gain for Long Term Pain
the maximum trucking-only value. If the shaft is deferred to
start when the production front is at 1100m, the uneconomic
final depth extends to approximately 1230m. If mineralisation
extends only to these depths, its value will be lost if the shaft is
deferred too long – the mine should cease with trucking only at
the economic limit of 1030m depth. But if the shaft is built
early enough, the mine will be economic for any depth of
mineralisation, down to the economic depth with shaft hoisting
of 1550m, and the value will be significantly greater than with
trucking only.
Identifying the exploration target required to justify the
infrastructure
Hall (2005) also describes how hypothetical calculations for a
range of potential depths of mineralisation can identify the
reserves required to justify the proposed infrastructure. It can be
seen that, if shaft hoisting starts when production is at 900m
Figure 6 - Exploration requirements to justify infrastructure capital
The dotted lines show the minimum depth, in absolute terms, of
mineralisation required, which is shown on the left-hand
vertical axis. The solid lines show this as the extra depth or
exploration lead at the time of starting the analysis and
evaluation, after the exploration results are available, with
values shown on the right-hand vertical axis.
It can be seen, as is also evident in Figure 5, that as shaft
sinking is deferred, the required depth of mineralisation to
justify it increases, and at an increasing rate. The required
exploration lead, however, has a minimum at somewhat less
than the trucking-only economic limit. Although Figure 5
indicates that, if it is justified, the earlier a shaft can be installed
the better, Figure 6 suggests that there may be practical
constraints on this. If for example drilling cannot be done to
depths beyond 300m, it will never be possible to prove a shaft
with a $5M margin over trucking only. If however it is only
necessary for the shaft to break even with trucking only, this
will be feasible for shaft hoisting starting when the production
front is anywhere between 700m and 1080m. The absolute
minimum exploration lead for breaking even is approximately
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depth, the mineralisation must extend to 1030m for the shaft
option to break even with trucking only, and to 1130m to
generate an extra $5M, which are 130m and 230m respectively
below the hoisting starting point. However, if shaft hoisting
starts when production is at 1000m depth, the required
minimum depths of mineralisation become 1150m and 1330m,
150m and 330m respectively below the hoisting starting point.
Working backwards from the starting point of shaft hoisting, to
allow for construction, preceded by analysis and decision-
making, the time when the exploration data must be available
can be estimated. In the example used, this is a total of 2.5
years, or 100 vertical metres of production advance. Depending
on the existing knowledge, the timing of the start of the
exploration programme and the overall depth that it has to
cover can be determined. Applying this process to a range of
shaft starting depths, curves such as in Figure 6 can be derived.
240m, with hoisting starting when production is at
approximately 920m. This is equivalent to 6 years’ production
at 40 vm / yr.
If it is decided to limit exploration costs by maintaining say 2 or
3 years’ reserves only ahead of the production front, it is clear
that a shaft will never be justifiable, even though it may have
been a better option. As well as limiting exploration
expenditure, the mine can also now avoid the costs of an
expensive study of shaft hoisting, since this will never generate
a better scenario with the limited reserves data available. The
mine must close at the economic limit of trucking only,
regardless of how much deeper the mineralisation may
ultimately be found to extend, and the fact that, with hindsight,
the shaft could have been installed with significant benefits.
Conclusions
Numerous strategic plan optimisation case studies are showing
that conventional wisdom is often far from wise. Typical
industry practices for determining cutoffs result in mine plans
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Short Term Gain for Long Term Pain

that are often far from optimal. Significant extra value can be
obtained from many operations, often by increasing the cutoff
and thereby reducing the reserve and the mine life. These
strategies can also reduce the volatility of returns when prices
change, and in particular can reduce the risk of negative returns
when prices fall.
The natural desire to reduce costs is often counter-productive.
Reducing the waste-stripping rate in open pits, and the rate of
decline advance underground, reduces the amount of
mineralised material available to work with, and will typically
result in reduced cutoffs to keep the mill full, and reduced
revenues that more than outweigh the mining costs saved.
Delaying or failing to provide apparently expensive services
infrastructure can later result in the services being unable to
support the planned production rates, with the loss of revenue
again outweighing the apparent saving.
Hall, B.E. and deVries, J.C. (2003) Quantifying the economic
risk of suboptimal mine plans and strategies. AusIMM
Managing Risk in Mining Projects Conference, Sydney,
Australia, September 2003.
Hall, B.E. and Stewart, C.A. (2004) Optimising the strategic
mine plan – methodologies, findings, successes and failures.
AusIMM Orebody Modelling and Strategic Mine Planning
Conference, Perth, Australia, November 2004.
Lane, K.F. (1988) The economic definition of ore; cutoff grades
in theory and practice. Mining Journal Books, London.
Horsley, T.P. (2005) Differential cut-off grades. 9th AusIMM
Underground Operators' Conference, Perth, Australia, March
2005

Savings obtained by deferring exploration expenditure may

make it impossible to ever justify capital expenditure for
efficient and low operating cost production facilities, which
could have extended the economic depth of mining, the mine
life, and increased the overall value extracted from the deposit.
Even if the expenditure is justified, continual deferral of capital
expenditure can result in there ultimately being insufficient
resource left to pay for it, again resulting in a reduction in both
mine life and value obtained for the company’s owners.

Ideally, the short-term tactical mine plan and the mine

operations should be working within the framework of an
optimised long-term plan that best delivers the company’s
goals. Occasional deviations from the strategic plan are a reality
in mining, but the tactical plans should be seeking to return to
the optimum strategic plan, which may in some circumstances
have to change as a result of events in the operations. The
danger comes when the tactical deviations are allowed to
become the long-term strategy by default, without an
assessment of how this may drive the operations away from
achieving the corporate goals. Tactical expediency can very
easily become “short term gain for long term pain”. The
planning and analysis tools and processes are available to
deliver more and better information to decision makers than
they have had in the past. The industry must look beyond
unwise conventional wisdom, and the costs of generating
optimum strategies, to see the long-term benefits that are
available but unfortunately are often not realised in our
operations today.

Acknowledgements
The author wishes to thank the management of AMC
Consultants Pty Ltd for permission to prepare and present this
paper. Past and present members of the AMC strategy
optimisation team are thanked for their contributions to the
development of the methodologies and knowledge and the
conduct of case studies that support the findings presented in
this paper.

References
Hall, B.E. (2003) How mining companies improve share price
by destroying shareholder value. Paper 1194, CIM Mining
Conference, Montreal, Canada, May 2003.
Hall, B.E. (2005) A quantitative assessment of the factors
influencing the shaft vs trucks decision. AusIMM Hoist and
Haul 2005 Conference, Perth, Australia, September 2005.

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